US economy slows, grew at moderate 2.2 percent rate in fourth quarter

The U.S. economy slowed more sharply in the final three months of the year than previously believed, reflecting weaker business and a bigger trade deficit.

The Commerce Department said Friday that the economy as measured by the gross domestic product grew at an annual rate of 2.2 percent in the October-December quarter, less than the 2.6 percent first estimated last month. It marked a major slowdown from the third quarter, which had been the strongest growth in 11 years.

Economists remain optimistic that the slowdown will be only temporary. In fact, many forecast that growth will accelerate to above 3 percent in 2015, which would give the country the strongest economic growth in a decade.

Many analysts believe the year will start slowly, in part reflecting the disruptions caused by a rough winter. However, it's unlikely to be as bad as the first quarter of 2014, when heavy snow and cold contributed to a 2.1 percent plunge in growth in the first quarter of 2014.

That big drop was followed by sizzling growth rates of 4.6 percent in the second quarter and 5 percent in the third quarter.

Analysts are looking for less of a roller-coaster ride this year. JPMorgan economists say growth will come in around 2.5 percent in the current quarter and then hover between 2.5 percent to 3 percent for the rest of the year. They are forecasting growth of 3.1 percent for the entire year, a significant improvement from the 2.4 percent growth seen in 2014.

If the forecast proves accurate, it would be the best GDP performance since the economy grew by 3.3 percent in 2005, two years before the beginning of worst economic downturn the country has experienced since the 1930s.

Naroff and other economists believe the key to the economy shifting into a higher gear will be further improvements in the labor market, when stronger job gains leading to rising wage gains.

"I see 2015 as a really good year for consumer spending because of the wage gains," Naroff said.

Even though the recession ended nearly six years ago, wage growth has been weak as businesses were able to pay less with so many unemployed looking for jobs.

Several large companies have already signaled a willingness to pay more to retain workers. Retailers like TJX and The Gap, as well as the health insurer Aetna.

News last week that Wal-Mart, the nation's largest private employer, would also increase its minimum pay could be a sign that a tighter labor market are finally leading to increased wages, some analysts believe.

The unemployment has fallen to 5.7 percent.

Fed Chair Janet Yellen, testifying to Congress this week, listed stronger wage growth as one of the elements the central bank is looking for before deciding to start raising interest rates. She said as long as wage gains remained weak and inflation low, the Fed was prepared to remain "patient" in moving to raise rates.

Many private economists believe the Fed's first move to increase its key rate, which has been near a record low of zero for six years, will not come until June at the earliest.